¶ … Limitations of the Research or Gaps
A Critical Analysis of the Business Judgement Rule under the Australian Corporation Law
There have been many large businesses which have collapsed unexpectedly to cause irreparable damage to the investors worldwide in recent years. The most recent and larger cases are those of the fall of the mighty U.S.-based Enron International and the Australian firm, HIH Insurance. These cases shook the faith of the stakeholders in the ability and the intention of the directors who were in charge of the operation of these enterprises. These cases have also made it harder for the directors to negate the fiduciary duty imposed upon them by the law. For instance, according to the 1997 Directors' Duties and Corporate Governance prepared by the Commonwealth of Australia, 'There has been increasing debate in Australia about the standard of corporate governance, particularly in light of the experiences of the late 1980s. On the one hand, there have been calls by investor and shareholder groups for greater accountability by directors. On the other hand, directors have been demanding greater certainty in respect of their potential liabilities having regard to notable corporate civil litigation cases.'[footnoteRef:2] [2: Directors' Duties and Corporate Governance: Facilitating innovation and protecting investors. Corporate Law Reform Program for Reform Paper No. 3 (1997). Commonwealth of Australia [21[.]
According to Farrar (1997), Australia shares a 'confused inheritance of English Law with regard to the duty and standard of care of company directors' with the United Kingdom (UK), but Australia differs from the UK by drawing on the business judgement rule as developed in the United States in an effort to provide corporate directors with a defence against negligence liability when their business decisions are made without self-interest and in good faith.[footnoteRef:3] In Moreover, Australia was also an early mover in attempting to clarify and codify these protections for corporate directors. In this regard, Farrar (1997) adds that, 'Australia was the first in the British Commonwealth to enact a statutory duty in s 107 of the Victoria Companies Act 1958' which simply stated that 'director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office'.[footnoteRef:4] This legislation subsequently served as the foundation for comparable provisions in the Uniform Companies Acts that were passed by each Australian state during the period between 1961 and 1963. [3: J. H. Farrar, 'The Duty of Care of Company Directors in Australia and New Zealand,' in Corporate Governance and the Duties of Company Directors (1997), I M. Ramsey (ed.) .] [4: Farrar .]
The general requirement on the part of the stakeholders and more so by the shareholders is that the business be run in a profitable manner and there shall be an attempt which is seen as an honest effort to maximise shareholder value without engaging in unduly risky enterprises or taking actions that may be well intentioned but are not in the company's best interests.[footnoteRef:5] It is apparent that there has to be a balance between the two different viewpoints. The directors of an organisation must exercise a duty of caution, certainly, but sometimes the best intended and well considered decisions do not achieve the intended results, outcomes that could result in termination and litigation to malign a certain section of the management even if there is no evidence of dereliction of duty. In this environment, the business judgement rule provides substantive protections for corporate directors who can demonstrate that they reached a given decision based on a prudent business perspective. According to Black's Law Dictionary, the business judgment rule "immunizes management from liability in corporate transactions undertaken within both power of corporation and authority of management where there is reasonable basis to indicate that transaction was made with due care and in good faith."[footnoteRef:6] [5: J. H. Croese, (2016). Corporate and Commercial Law (2nd ed.). Melbourne: CCH Australia.] [6: Black's Law Dictionary, St. Paul, MN: West Publishing Co. ]
In some cases, directors make new and innovative business decisions that are intended to improve the earning quality of a firm and these decisions are taken keeping in mind the welfare of the shareholders, but these decisions are not successful all of the time. Indeed, the historical record confirms that some decisions can backfire and fail in a highly charged and dynamic marketplace. In sum, the business...
In this regard, Greenhow reports that, "The business judgment rule will protect those directors who make business judgments in good faith and for a proper purpose, have acted on an informed basis without material personal interest and who have a rational belief that the decision is in the best interests of the corporation. If one of these requirements is not met, the rule will not provide any assistance."[footnoteRef:7] [7: A Greenhow, 'The Statutory Business Judgment Rule: Putting the Wind into Directors' Sails,' (1999) Bond Law Review, 11(1) .]
These protections are important because directors are always working in a fiduciary position on behalf of the shareholders of the firm and all their activities are supposed to be devoted towards increasing shareholder value. Directors are thus required to act honestly and faithfully without taking decisions which are against established corporate policies, so naturally the shareholders want the directors to act in a manner which is able to increase not only the shareholder's wealth but also maximise profitability; however, in some cases the desired outcomes may not be achieved notwithstanding the best decisions made by directors based on a prudent business view.[footnoteRef:8] [8: J. H. Hargovan, Australian Corporate Law (2014) Melbourne: Lexis Nexis .]
As of 13 March 2000, a statutory business judgment rule became effective in Australia pursuant to the Corporate Law Economic Reform Program Bill 1998 which was approved in October 1999. As a result, Greenhow (1999) emphasises that, "The position is now clear -- the merits of bona fide business judgments made by directors... will not be subject to judicial review. Directors will be taken to have met their duty of care and diligence."[footnoteRef:9] Likewise, the decision in Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 ('ASIC v Rich') renewed interest in the business judgment rule in Australian corporate law, so that the rule is capable of providing a defence in some cases that would otherwise amount to a breach of a director's duty.[footnoteRef:10] [9: Greenhow .] [10: Legg & Jordan ]
The business judgment rule therefore according to Gevurtz (2013) thus acts as a lifeline to the embattled community of directors and others in management from any such liability that might be Invoked by shareholders when the decisions are taken within intra vires powers of the corporation and within the powers granted to the board of directors and which are taken within the definition of due care and honesty.[footnoteRef:11] From the perspective of Gevurtz and like-minded critics of the business judgement rule, "directors should not be treated any differently from doctors or lawyers and that business decisions are very similar to decisions of other professionals."[footnoteRef:12] [11: F. Gevurtz, Corporation Law (2nd ed.) (2013). Sydney: West .] [12: Greenhow .]
Three main factors serve to differentiate other professionals from corporate directors as follows:
1. Other professionals undergo extensive theoretical training (usually six years to complete a degree) followed by a period of practical training to achieve their position. Directors, on the other hand, whilst usually possessing university qualifications, must adapt to the philosophy and culture of the company, bearing in mind the nature of the company's activities.
2. Other professionals act within a narrow range where the variables are constant and there are, to an extent, protocols to be followed. Directors, on the other hand, are acting in an unpredictable environment, where factors such as economic conditions are outside their control.
3. At the end of the treatment (in the case of doctors) or the transaction (in the case of lawyers) the relationship ends (subject to any residual claims in tort). Directors are in a continuing relationship with the company and are more akin to permanent consultants rather than sub-contracted experts.
After the fact review of the decisions made by corporate directors, though, involves a determination of the same kind with respect to other professionals who are required to take risks in their fields of endeavour.[footnoteRef:13] For example, according to Greenhow, 'In [Gevurtz'] opinion, judges are called upon regularly to make decisions in cases involving conflicts of interest and argues that negligence cases should not be distinguished. Some have considered that the rule fails to recognise the practical workings of a Board.'[footnoteRef:14] [13: Greenhow .] [14: Greenhow .]
The business judgement rule functions by conceptualizing corporate boards as so many faculty members meeting to discuss the issues of most importance at the time, but corporate boards are in reality far different in composition and focus. In this regard, Greenhow points out that, 'Instead, boards operate by consensus…
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